Tesla limits investors’ ability to sue over breach of fiduciary duties

In a regulatory filing out Friday, Elon Musk-led automaker Tesla announced a change to its corporate bylaws that may limit shareholders ability to sue the corporate if investors imagine the corporate’s board or executives committed any breach of fiduciary duties.

The filing says the brand new bylaw went into effect as of May 15, and that Tesla has adopted “an ownership threshold requiring any shareholder or group of shareholders to carry shares of common stock sufficient to fulfill an ownership threshold of at the least 3% of Tesla’s issued and outstanding shares to be able to institute or maintain a derivative proceeding.”

Tesla’s current market cap stands over $1 trillion. A 3% stake of common stock and all outstanding shares could be price greater than 30 billion dollars.

Tesla didn’t immediately reply to a request for comment on the change to its bylaws.

In line with Ann Lipton, an experienced corporate and securities law trial attorney who now teaches at Tulane Law School, the corporate is benefiting from a Texas state law that permits corporations to limit shareholder lawsuits against insiders for breach of fiduciary duty. The law permits firms which can be incorporated in Texas, as Tesla is currently, to require a shareholder to own 3% before bringing a claim. 

“Obviously, for a corporation of Tesla’s size, that might be a formidable barrier to anyone bringing a lawsuit for breach of fiduciary duty,” she said in an email.

By comparison, when Tesla was incorporated in Delaware, a shareholder who held just nine shares of Tesla stock was the plaintiff in a shareholder derivative suit that resulted in a judge ordering CEO Elon Musk’s 2018 CEO compensation package to be rescinded, Lipton noted.

Delaware Chancery Court Chancellor Kathaleen McCormick found that Musk, reasonably than Tesla’s board, had controlled the corporate and that the board’s compensation committee misled shareholders before looking for a vote to approve that pay plan. Additionally they didn’t negotiate with Musk over the terms of the deal, as a substitute working “alongside him, almost as an advisory body,” the judge ruled.

The Tornetta decision, named after Tesla shareholder Richard Tornetta who brought the suit, prompted Musk to say, “Never incorporate your organization within the state of Delaware.” Tesla moved its site of incorporation to Texas in June 2024 after attaining shareholders’ approval to accomplish that after that loss in court.

Tesla has since appealed the Tornetta decision and Delaware’s state supreme court will resolve if Musk can keep the shares granted to him through the 2018 CEO pay plan or not. That pay plan had been price around $56 billion.